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11/11/2013

Country risk and economic studies

Emerging Asia: Coface warns of growing risks linked to household debt

The growth potential in Asia remains high, driven by the middle class.

Asian economies have weathered the double blow of the global crisis of 2008-2009 and that of the sovereign debt of the eurozone, due notably to the dynamic consumption of their households. For example, since 1995 per capita consumption has almost tripled in China and has more than doubled in India, illustrating the catch-up underway in the least developed countries. This catch-up, mostly incomplete for now, will continue over the long term and will be conveyed by the expansion of the middle class in Asia. As a consequence of sustained GDP growth and public policies to support consumption, household income is rising. The aging population and rapid urbanisation are also contributing to it.

Three key areas will continue to fully benefit from increased consumption of the middle class in the coming years:

tourism due to the large numbers of Chinese travelling to other countries in the region.

Malaysia, South Korea, Singapore and Thailand: household debt similar to that of the United States at the time of the subprime crisis

If the boom in consumption in emerging Asia reflects the economic development of the region, it is also linked to easier access to bank credit. Hence, excessive household debt in some countries could adversely affect economic activity in the medium term. Four countries are most at risk. In 2012, the ratio of household debt to disposable income reached 194% in Malaysia, 166% in South Korea, 134% in Singapore and 112% in Thailand, whereas it was of the order of 130% in the United States in 2008, that is to say at the start of the subprime crisis. The result has been a household debt service higher than in the United States in 2008 and in Spain in 2012 (where it is largely responsible for the deep recession).

It is South Korea that dominates the Top 4: the structure of its debt is an additional risk factor because the proportion of variable-rate mortgages has reached 55%, compared to only 10% in the United States in 2009.

Moreover, this excessive debt caused by too dynamic credit may make Asian countries more vulnerable in the medium term with volatile external financing and thus capital outflows. It also may result in sudden depreciations in the exchange rate, like those observed during the summer of 2013.

"The parallels with the situation of US households at the time of the 2008 crisis don’t necessarily mean that a crisis of similar magnitude is imminent in emerging Asia. But moderation in household consumption will be needed over the coming years. To address the risk that over-indebtedness of households poses to the economy and the banking sector, local authorities must take preventive measures, such as tighter monetary policies and stricter prudential rules," says Julien Marcilly, Head of Country Risk.